Category: Insurance case law · Reviewed by Taylor Watts, Broker · New Business · Last reviewed June 2026
Where reinsurance is governed by English law but the underlying direct insurance is governed by a foreign law, identical wording in the two contracts is not necessarily to be construed identically; back-to-back presumption gives way to ordinary principles of contractual construction.
Lexington Insurance Co had written a property all-risks policy in favour of Alcoa Inc, the US aluminium producer, covering damage to a large number of Alcoa sites across the United States. The policy ran for the three-year period from 1 July 1977 to 1 July 1980 and was on a “losses occurring during” basis. The policy was governed by the law of the relevant US state (the case proceeded on the basis that Massachusetts law applied to the underlying policy, with that law being broadly representative of the position taken by US courts in environmental coverage litigation).
Lexington in turn reinsured a portion of its exposure under that policy with Wasa International Insurance and other London-market reinsurers. The reinsurance was written on the same period and on wording that materially mirrored the direct policy. The reinsurance contract was governed by English law.
Many years later, Alcoa was held liable in proceedings in the United States for environmental contamination at numerous sites. The US courts applied the prevailing US approach to coverage allocation, which permitted the insured to recover under any policy in force at any time during which the progressive damage was occurring, regardless of how small a proportion of the actual damage took place during the policy period. On that approach, Lexington was held liable to indemnify Alcoa for contamination damage that had in fact occurred over decades, much of it outside the three-year policy period.
Lexington paid Alcoa and sought to recover under the reinsurance. Wasa and the other reinsurers declined, arguing that under English law — which governed the reinsurance — only damage actually occurring during the three-year reinsurance period could be recovered, and Lexington had not proved what proportion of the loss had occurred within that period. The dispute reached the House of Lords on the question of whether the reinsurance should be construed back-to-back with the underlying policy as interpreted by US law.
The central issue was whether, in a reinsurance contract governed by English law and containing wording materially identical to a directly insured policy governed by a foreign law, the reinsurance wording should be construed in the same way as the underlying policy had been construed under that foreign law — so that the reinsurer’s liability mirrored that of the reinsured — or whether the reinsurance wording should be construed according to its ordinary meaning in English law, irrespective of the construction applied to the direct policy.
The question implicated the so-called “presumption” or principle that reinsurance is back-to-back with the underlying cover, and the long-standing market expectation that reinsurance written on identical terms and for the same period as the direct policy will respond whenever the direct policy responds. It also raised, by extension, the proper allocation of risk between the direct market and the reinsurance market where developments in the law of the underlying jurisdiction expose direct insurers to liabilities that go beyond what the policy wording would convey if construed by an English court.
The House of Lords unanimously dismissed Lexington’s appeal and held in favour of the reinsurers. Their Lordships held that the reinsurance contract, being governed by English law, fell to be construed in accordance with English principles of contractual construction. On that basis, the words “losses occurring during” the three-year period covered only those losses, or portions of losses, that had in fact occurred during that period; they did not cover progressive damage occurring across a much longer span merely because some part of the damage had taken place within the period.
Their Lordships acknowledged the practical expectation in the London market that facultative reinsurance written on the same wording and period as the underlying policy would be back-to-back. However, they held that this expectation could not override ordinary principles of contractual construction. The reinsurance contract had been entered into in 1977; at that date, no one could have foreseen the way in which US courts would later interpret occurrence wording in environmental claims. The reinsurers could not be taken to have agreed in advance to be bound by whatever construction US courts might subsequently place on the underlying policy.
The House of Lords thus drew a sharp line: where the proper law of the reinsurance differs from the proper law of the direct policy, identical wording will not necessarily produce identical outcomes, and reinsureds bear the risk that the foreign law applicable to the direct policy may impose liabilities that English law would not impose under the same words.
A reinsurance contract governed by English law is to be construed in accordance with English principles of contractual interpretation, and not by reference to the construction that has been or might be placed upon identical wording in a directly insured policy governed by a different system of law. The presumption that facultative reinsurance is back-to-back with the underlying policy is a guide to construction, not an overriding rule; it cannot compel an English court to give the reinsurance words a meaning they would not bear under English law, particularly where the foreign-law construction of the underlying policy was not foreseeable at the time the reinsurance was written. The risk that foreign law will expand the direct insurer’s liability beyond what English law would impose on the same words is borne by the reinsured, not by the reinsurer.
Wasa v Lexington is a landmark decision for the London reinsurance market and is of profound practical importance for any reinsurance written on English law covering risks situated abroad — in particular, US-situated risks where coverage litigation is conducted under foreign legal principles that differ materially from English ones.
The decision warns reinsureds that they cannot assume their reinsurance will respond automatically to whatever they are required to pay under the underlying policy. Where the direct cover is written on foreign law that takes a more expansive view of allocation, trigger or scope than English law would, the reinsured carries the gap. This has driven, in the years since, an increased focus on express choice-of-law clauses in reinsurance, on express incorporation of underlying-policy construction principles where back-to-back response is intended, and on the use of “follow the settlements” and “follow the fortunes” clauses sufficiently broadly drafted to capture foreign-law constructions of the direct policy.
For brokers placing US-exposed risks into the London market, Wasa is required reading. It informs the drafting of facultative reinsurance, particularly for long-tail liability and environmental exposures, and it sits alongside Hiscox v Outhwaite, Insurance Co of Africa v Scor and Hill v Mercantile & General Re as part of the modern body of authority shaping reinsurance response.
The case also has continuing relevance to legacy and run-off portfolios, where environmental and asbestos claims continue to generate disputes over allocation between policy years and between direct and reinsurance layers. It is a leading authority on the limits of the back-to-back presumption and on the interaction between English reinsurance and foreign direct cover.
By Matt Bartlett, Director, on 2026-06-06. Next review: 2026-12-06.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-06. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
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